Bitcoin is known for the various phenomena that occur within its existence: from bitcoin forks to bitcoin halving cycles, CrossTower has you covered!

Bitcoin Halving is the reduction of the reward for mining a new block—in the maintenance of the blockchain network—by half. This occurs when a predetermined number of blocks have been found. Halving, which limits the number of bitcoin in circulation, serves to curb inflation and often results in a change in bitcoin’s value. This process will continue to recur until the maximum number of bitcoins have been distributed: 21,000,000.

Why Does Bitcoin Halving Happen?

Halving happens because bitcoin operates on a Proof-of-Work consensus mechanism – bitcoin must be mined in order for the network to operate. 

Bitcoin Mining

Mining is the process by which individuals (or organizations) with strong computing power–and a lot of time and energy–solve complex equations that prove to the network that they are processing transactions.  

In exchange for their efforts, miners receive a block reward, which incentivizes them to continue the maintenance of the blockchain. If the reward were to remain constant, the number of bitcoin in circulation would increase beyond a scalable capacity and ultimately render the currency useless. Halving is a feature that ensures the introduction of new currency into circulation without flooding the system at large. 

How Many Bitcoin Exist?

There is a finite supply of twenty-one million bitcoin, between that which is currently traded on the blockchain and that which has not yet been mined. While the number in circulation constantly increases as more crypto is mined, more than eighteen million have been released by the third bitcoin halving cycle and under three million bitcoin remain undiscovered.

What is a Block Reward?

The reward for each mined block is a Block Reward, which is reduced by half every 210,000 blocks that are mined, as illustrated in the following table:

Because the reward is reduced each halving cycle, there is less incentive for miners to continue. This is because their expensive operation in the maintenance of the blockchain reaps lower rewards. This, in part, is responsible for sharp increases in value that has been observed soon after halving cycles. 

When Does Bitcoin Halving Occur and What is the Effect on Value?

Since 2009, the block reward has been halved three times from 50 to 6.25 bitcoins per block. This procedure will continue for approximately 120 years until miners are no longer rewarded with bitcoin. Miners instead will receive a portion of the fees for processing transactions. The most recent halving event was in May 2020 and the next event is expected in 2024. 

Essentially, the theory is that when the reward is halved, the effect on inflation is similarly halved. This results in a lower supply available, which in combination with the increase in demand, results in a higher price. In short, halving does not itself increase the price as a mechanism of securing the network. Although, the event has generally correlated with a steep increase in value.

Conclusion

Bitcoin halving is a critical event and it is important for its stakeholders. It is vital for traders, miners, investors, and various other users to understand the mechanism.  This is because its introduction to the economy differs greatly from that of traditional currency. This knowledge is essential for cryptocurrency owners, particularly when deciding what to do with their coins as a cycle closes. 

CrossTower Inc. provides this content for general information purposes, to better inform you on your digital asset investment journey. We do not provide investment recommendations or provide tax advice. Please consult your investment professional or tax advisor if you require assistance in these areas.

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